Straight Line Depreciation

Brian Krogol
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Alright so let's see how we're going to calculate our depreciation expense per period in the straight line method. So remember we've got our three variables cost useful life and residual value. We're gonna be dealing with this in all the different depreciation methods. Okay so let's see how it works here, notice we've got cost minus residual value in our numerator. So what we call this cost minus residual value. Well this is called the depreciate ble base. Okay appreciable base because this is what we are going to depreciate. Think about it. We've got the cost, what we paid for it minus the residual value. What's gonna what we think it's worth at the end? So everything in between the cost minus the residual value. Well that's what we're gonna depreciate. So after we do this depreciation we're gonna be left with the residual value. Okay so cost minus residual value divided by the useful life and pretty much all the time. We're gonna be talking about years of of useful life. Okay so this is going to tell us the depreciation expense per period. Okay so the nice thing about the nice thing about um straight line depreciation, that makes it so easy is that every year every period we're gonna have the same amount of depreciation expense. So that's why it's a little easier. Let's go ahead and jump into an example. So I can show you what I mean on january 1st. Let me keep that on the screen on january 1st year, one, johnson and johnson and johnson company purchased a delivery truck for $42,000 the company estimated a useful life of five years and a residual value of $2000. What would be the entry to record depreciation when preparing the december 31st year one? So notice it's been a year, right? We bought it on january 1st announced december 31st. So the entry to record depreciation and the netbook value. So we'll get to net book value in a minute. But let's start, let's start here with our depreciation expense per year. And how much depreciation we're gonna take the first year. So let's use our formula. We've got cost minus residual value over useful life. So the depreciation expense, I'll put D. E. P. Expense per year. Which also means the first year. What's the depreciation expense? Well it's gonna be the same amount. So depreciation expense per year. Well that's gonna be our cost of 42,000 minus a residual value of 2000. Right? That's what they told us in the problem. 42,000 minus 2000. And what's our useful life? five years. Right? So we think it's gonna be useful for five years. So let's go ahead and find out our depreciation per year. So notice 42,000 -2000. That's 40,000, right? That is our depreciate ble base, as we said above. So the total amount of depreciation. We're going to take over the five years is the 40,000 that depreciate ble base. So we divide it by five and we're gonna get 8000 per year in depreciation, right? So that's why this is so simple. We've already got our depreciation for every year for the next five years. Alright so our entry our journal entry, every time we record depreciation expense we're gonna make this entry no matter what um no matter what method we're using straight line or the other methods we're gonna deal with later. We're going to debit depreciation expense for the amount 8000 here. And it's a debit right? Because it's an expense. So we debit our expenses and what's going to be our credit are credit is accumulated depreciation. So remember that this accumulated depreciation, accumulated depreciation. And I'm gonna just put D. E. P. Accumulated depreciation is a contra asset, right? So this is lowering that net book value. Right? So now let's calculate net book value. Remember we have our asset of the truck which has a debit balance and then the accumulated depreciation is going to have a credit balance lowering this netbook value. So this netbook value, we call it N. B. V. For netbook value is our cost minus accumulated depreciation. Okay that's how we calculate our net book value. And this netbook value. That's generally what we show on our balance sheet on our financial statement will show the net value of the truck. Okay so let's go ahead and calculate this. So after one year after we've depreciated it for one year. Well our cost was 42,000 minus accumulated depreciation. Well, it's only been one year. So we've only accumulated one year of depreciation, which is 8000. And Our Net Book Value is the 42000 -8000. We've got a 34,000 net book value. Okay, so just to reiterate how we might see this on a balance sheet here, um I'm trying to get out of the way so you can see behind me, doesn't seem to be working. So I'll try and stay out of the way and I'll do it here on the side. All right. So what we've got, we would show our assets, just like we do on any balance sheet, right? We would have our cash, we would have our accounts receivable inventory, whatever assets we have, right? And would show their balance, and then we might get to our fixed assets and we'd say something like truck, and we would show 42,000 right? The cost of the truck. And then we'd say something like less accumulated depreciation, which I'm just gonna say a prayer a slash D for accumulated depreciation. And we would say less accumulated depreciation, which at this point is 8000 and then we would show the netbook value here of 34,000 troops. Make it fit on the screen there. I'm balancing between staying out of the way, since I can't get out of the way for some reason right now. Alright, So we would show the Netbook value just alongside all of our assets there. So notice we're showing the historical cost, we're leaving the truck the value of the truck that we paid for at its historical cost, but then we lower it with this accumulated depreciation over its life. Okay, so let's pause here, and on the next page, we're gonna continue this example and kind of follow the whole life of this asset. Alright, let's go ahead and do that now.